Indian prices show no signs of relenting

Published:
22 January 2007

After being range-bound for over six months, cement prices have once again started to rise across the country. In New Delhi, for instance, cement is now selling at over Rs 215 per bag of 50 kg, compared to less than Rs 200 per bag in early October ’06.

On a year-on-year (YoY) basis, the increase in retail price works out to over 25%. Though definite prices are not available for other major centres such as Mumbai, Chennai and Kolkata, a similar price trend is expected in these cities as well.

Since October-June is the peak season for construction of houses, we expect cement prices to increase further by 10-15% and peak by the middle of June, just before the arrival of the monsoon. Last year, for instance, cement prices rose by 20% during January-June across the country. There’s no reason why ’07 will be any different. Housing and real estate construction account for over 60% of cement demand in India.

This augurs well for the third-quarter results of cement makers. With excise duty on cement remaining unchanged at Rs 408 per tonne, growth in sales realisation and operating profit will be even faster.

We estimate cement majors to report over 45% growth in sales realisation for the December ’06 quarter, compared to industry’s average sales realisation of Rs 2,160 per tonne recorded during December ’05. With manufacturing and operational cost likely to grow between 20% and 25%, the industry’s operating profit could treble in the quarter.

The surge in the cement sector is due to a rise in cement demand, fuelled by growth in gross domestic product (GDP) and infrastructure investment, and sluggish growth in new capacity creation. While cement demand is growing at 11-12% y-o-y, the industry’s installed capacity is expanding at only 3.5% y-o-y. This pushed up the industry’s capacity utilisation to over 93% during April-November ’06.

While the price boom in the sector and an expectation of sustained double-digit growth in demand has fuelled a capital expenditure (capex) frenzy in the industry, supply is expected to remain tight till the June ’07 quarter.

In next 2-3 years, the industry is expected to add 70-80Mt of cement capacity. This is almost half the current installed capacity. Regional players have been the most aggressive in capacity expansion.

However, a bulk of these planned capacity additions will be commissioned in late FY08 and FY09. In the current fiscal, the additional capacity is likely to be only in the range of 14-16Mt, which is just enough to cater to incremental demand during the year, thus leaving the demand-supply situation unchanged.

Cement production and demand is closely linked to economic activity and industrial growth. There is a lagged effect of growth in GDP on demand for cement. It is generally believed that every 1% growth in GDP leads to 1.2% growth in cement consumption in the following year.

With GDP expected to grow in the range of 8-9% in future, industry executives expect cement demand to grow at 10-11% on a y-o-y basis. However, we expect cement demand to grow faster than 1.2x GDP growth on the back of infrastructure spending and industrial investment.

Currently, infrastructure and industrial projects account for only 20% of cement consumption in the country. This is expected to change in future, with the government planning massive investments in highways, irrigation, railways and power sectors, as well as urban infrastructure. This will give a big push to cement consumption in India.

For instance, the highways sector is currently a small consumer of cement, as roads are primarily paved with bitumen. However, going forward, a larger portion of the national highways and expressways are expected to be made of concrete, significantly pushing up cement demand in the country, as has happened in the case of China.